US: Currency intervention to be the next step in Trump’s trade war? - NBF

Krishen Rangasamy, analyst at National Bank Financial, suggests that after having failed to stem the deteriorating U.S. trade deficit with tariffs, could Trump resort to currency intervention to weaken the USD?

Key Quotes

“Who would do the job for him? Jerome Powell quickly washed his hands of this by pointing out it’s not the Fed but rather the Treasury that is responsible for currency policy.”

“Steven Mnuchin, the Treasury Secretary, seems more amenable to the idea based on his recent statement that there is no change to dollar policy “as of now”, implying he is open to intervention at a later date. If the Treasury decides to intervene, how would that work?”

“Secretary Mnuchin would have to direct the New York Fed, which is the fiscal agent of the U.S. Treasury’s Exchange Stabilization Fund (ESF) to execute the required trades using that fund’s holdings of euros, yen, SDRs, and government securities to achieve the objective of lowering the value of the dollar. Will that be enough to significantly improve the U.S. trade balance? Probably not.”

“So, if the White House wants to achieve its objective of sustainably shrinking the U.S. trade deficit (and hence its current account), it has to sufficiently increase the national savings rate. But that would mean reducing the U.S. budget deficit and encouraging consumers to save more, i.e. things that would slow near-term economic growth.”

“Barring a recession/slowdown (which would automatically lift the national savings rate as observed after the 2008/09 slump) and considering the current breed of politicians is unlikely to promote such corrective policies, expect red ink on U.S. trade to persist regardless of whether or not there is currency intervention from Secretary Mnuchin.”